The subject invention relates to a system for approving authorization requests made by a merchant regarding the credit worthiness or solvency of a cardholder. More particularly, a new and improved system is disclosed wherein the issuer of bank cards can control the circumstances when an authorization request from a merchant is forwarded to the issuer for approval. By this arrangement the issuer can regulate its authorization expenses and balance these expenses against potential credit and fraud losses.
In recent years, the use of bank cards to facilitate purchases without cash has been widespread. In a typical debit or credit card system, a potential user applies to an institution, generally a bank, for a card. This institution, called the issuer, will provide a bank card to the user if he meets certain financial requirements. The issuer then opens a file having account information on the cardholder. This file is continually updated and supplied with data concerning recent purchases and payments. As discussed below, the file kept on each customer is used to determine whether a particular purchase should be approved. The bank card can be used as a means for extending credit, or for debiting a deposit account funded by the customer.
The cardholder may purchase goods in any establishment which accepts that particular card. Each establishment, hereinafter referred to as the merchant, is generally associated with an intermediate institution. The intermediate institution, hereinafter referred to as the merchant member bank, is responsible for enlisting various merchants to accept the particular credit card for purchases.
In use, the cardholder presents his card to the merchant for payment of either goods or services. The merchant forwards a draft of the transaction of the merchant member bank for payment less a service charge. The merchant member bank in turn, presents the draft to the issuer bank for payment less a service charge. The issuer bank then bills the cardholder for the transaction amount. In the alternative, the cardholder can maintain an account at the issuer bank, and can have a debit card arrangement whereby the account can be debited by the issuer either at the time of the transaction or when the merchant member bank supplies the draft for payment.
Typically, the presentation of the draft and the payment by the issuer is accomplished electronically through a linked computer network. In order to facilitate the electronic transfer of funds, a data control center is utilized. More particularly, a data control center is provided which is electronically connected to a plurality of issuers. The control center is also connected to a plurality of merchant member banks. Thus, information passing between merchant member banks and the issuers is routed through the control center.
As can be appreciated, any funds transfer system must be protected in a variety of ways from credit and fraud losses. Thus, safeguards are typically provided to limit the use of lost or stolen bank cards. Further, the system usually includes methods for limiting the amount of purchases a customer is allowed to make in a given period of time. Even with protection, credit and fraud losses amount to hundreds of millions of dollars per year to the parties involved in the system.
In the prior art, there have been developed a variety of techniques for reducing losses. The simplest type of loss control system consists of the printing and distribution of a bulletin, listing the account numbers of lost or stolen bank cards. The bulletin, compiled using information supplied by the issuers, is distributed to the merchants. By checking the customer's account number against the list in the bulletin, the merchant can determine if a particular card can be accepted. However, the use of a bulletin as a loss control technique is undesirable for a number of reasons. For example, a number of days will elapse between the time a card is reported lost or stolen and the time that information is circulated to merchants. Further, the bulletin cannot be used to control the amount of purchases charged to one card in a given period of time.
Accordingly, various electronic loss control systems have been developed which permit immediate processing and entry of data relating to lost and stolen bank cards. The system may also be used to keep track of bank card activity in order to prevent overuse of the card. In a typical prior art system, before accepting the bank card for payment, a merchant will electronically forward a request for authorization to the merchant member bank. Generally the request for authorization is entered by the merchant into the system via a telephone or automatic terminal.
If the merchant member bank is, in fact, the issuer of the particular bank card, the authorization request can be handled internally. More particularly, the merchant member bank will check its account file for the cardholder and decide to approve or deny the transaction. In most cases however, the issuer of the card is different from the merchant member bank. In the latter situation, the merchant member bank electronically routes the request for authorization to the data control center. The data control center will then forward the request to the particular issuer of the bank card. The remote issuer can then check its account file on the cardholder to determine if the card has been reported lost or stolen or if the customer has exceeded his credit limits or depleted the funds in his deposit account. An acknowledgment, either approving or denying the transaction, is then transmitted back to the merchant through the data control center and the associated merchant member bank.
The cost of authorizing a transaction is borne by the issuer. These costs are a function of computer processing time and data transmission fees. As can be appreciated, these costs can be relatively high due to the large number of purchases made every day. In fact, if an issuer had to approve every transaction, authorization expenses would exceed losses related to fraud.
One method of balancing authorization costs with fraud losses is to impose minimum transaction levels below which the merchant will not request an authorization. By this arrangement, the processing costs for all small transactions can be eliminated. Accordingly, in the prior art, merchants are instructed to request authorization from the issuer only if the transaction exceeds a certain defined limit.
This method however, is not satisfactory, since the inflexible limit used by the merchants is not compatible with the different needs of various issuers. For example, if the issuer is fortunate to have cardholders which present little credit loss problems, benefits would be maximized by imposing a high transaction limit on the merchants. By this arrangement, requests for authorization and their associated costs are minimized. In contrast, an issuer having substantial credit and fraud problems would benefit from low limits, such that more transactions are checked. If the latter situation, authorization costs would be substantially higher, but would be offset by reduced losses.
In the prior art practice, the transaction limits supplied to the merchants represent a compromise solution. The issuer, which may pay for the authorization requests, has no control over these limits. Accordingly, it would be desirable to provide a new and improved system wherein the limits or parameters controlling whether a request for authorization is forwarded to the issuer are regulated by each issuer. By this arrangement, each issuer can balance the expense of providing authorization responses with their particular credit and loss problems to operating expenses.